Painting the Picture

27th August 2019

My office arranged for me to see a property in Belgravia.  The property is owned by an eccentric elderly lady.  It was full of antiques, pictures and trophies.

The flat is in one of the primest locations in London, and the world.

It has plenty of natural light and outdoor space, it is actually duplex, with two bedrooms.  With all the paraphernalia you could be forgiven for missing this.

The property has a short lease of 31 years.  We are able to arrange finance for properties with leases of even 40 years, unfortunately this one falls short of the criterion.

The agent told me discreetly that the lady had not worked a day in her life and had wealth given to her.  The lease simply shrunk, to a point where it has become unfinancible, and therefore a large chunk of the market is excluded.

She had carers floating around her continuously, ensuring she was as comfortable as possible.

The property was originally on the market at £950K, it had been reduced by £150K.

It was obvious from observing the situation this lady ideally did not want to leave this space.  It was tailor made for her according to her whims.

Therefore, an offer for the flat which included her continued tenancy as part of it would be viewed highly favourably.  Perhaps this point would tilt the deal in our favour, more than the amount offered.

We put in an offer for £500K, all with her continued occupation at a rate of £1K per week.  This would give our client a yield of 10% per annum.

The cost for the lease extension has been quoted at £700K and the end price for this flat with an extended lease is estimated at around £1.6M.  Therefore, there is expected to be about £400K of gain.

The way to structure this deal is to complete on it at the same time the lease extension has been granted.  This will reduce your input into the deal.

However, this is an uncertain market and therefore the resale price cannot be relied upon.

This is a good environment to extend the lease, as the current situation can be used to ensure a very low cost of extension.

The offer had been considered with enough seriousness for me to be called to another meeting.  This time it was a full board meeting, we had three additional people in attendance.

This time the lady was sitting upright and gave me snippets of her background, which helped paint the picture more fully. She had been brought up in Africa and had a shop there along with her late husband.  They also hunted, which was evidenced by some of the heads hanging from the wall.

In this situation, how she was going to spend the £500K needed to be looked at very carefully.  With carers fees this amount could evaporate; she could live for another decade, in which case she would be unable to pay her rent.

This is not a situation we would want to be in, therefore, we need to ensure a guarantor has been put on the agreement to ensure continuity of rent.

The other option is to use some of the funds to purchase an annuity.  This is linked to life expectancy.  In exchange for a single lump sum one gets in return a stream of monthly payments for the duration of one’s life.

The age and medical condition would be the predominating factors in calculating the price of the annuity.

Given the circumstances this should not cost too much.  This purchase would help significantly with continuity of rent and healthcare.  This is something I could suggest as part of the deal, should the guarantor option not be available.

This is a very interesting deal, one where the potential investor could pick up a diamond, for a very reasonable price and yield.

Suresh Vagjiani

Suresh Vagjiani
Suresh Vagjiani
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